Analysis and quantification of a new fiscally neutral European tax : executive summary.
Date: 2016-03-18
Institutions: European Economic and Social Committee
Subjects: EU employment policy, environmental tax, fiscal policy, greenhouse gas, production, tax, tax on consumption

Analysis and quantification of  
a new fiscally neutral European tax 

Executive summary 

Authors: Univ. Prof. i.R. Dipl.-Ing. Dr. Mikuláš Luptáčik and Peter Luptáčik 

This study was carried out by Industriewissenschaftliches Institut (IWI) following a call for tenders 
launched by the European Economic and Social Committee. The information and views set out in this 
study  are  those  of  the  author(s)  and  do  not  necessarily  reflect  the  official  opinion  of  the  European 
Economic and Social Committee. The European Economic and Social Committee does not guarantee 
the accuracy of the data included in this study. Neither the European Economic and Social Committee 
nor any person acting on the Committee’s behalf may be held responsible for the use which  may be 
made of the information contained therein.  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Analysis and quantification of a new fiscally neutral European tax.  
Executive summary 

The EU cannot function properly, if it does not have enough own resources. The present system of 
financing the EU budget is based on own resources, other revenue and surplus carried over from the 
previous  year.  The  components  of  the  current  own  resources  system  are  traditional  own  resources, 
VAT based own resources and GNI-based own resources (resulting from the application of a uniform 
call rate to total EU GNI to match the total volume of resources to the total volume of expenditure) 
and correction mechanisms, which grant particular Member States a reduction of their contribution to 
the EU budget. Criticism of the present system is coming primary from the European Parliament and 
the Commission. The Court of Auditors and the European Economic and Social Committee (EESC) 
initiate the discussion on this system by considering new types of own resources that would change 
the current way of funding the budget of the EU. 

The present study contributes to the discussion on the new European tax or fee, which would be based 
on taxing end consumption (taxing the products and not the production) according to how much CO2 
is emitted during the production of particular commodities, irrespective of whether all or a part of this 
process takes place inside or outside the EU. The analysis is based on the input-output model, which 
provides  an  appropriate  and  unique  approach  for  measuring  the  total  CO2  content  of  the  various 
commodities taking the entire production chain into account. The calculation by products can be the 
basis for the estimation of product specific CO2 taxes.  

The model calculations based on the Input-Output Table for the EU-27 for the year 2011 leads to the 
tax rate of 40,69 euros per tonne of CO2 emissions, which could have generated fiscal revenue in 
the  amount  of  1 %  of  EU  GDP. In line with the principle of fiscal neutrality, consumption in the 
form  of  reduction  of  labour  costs  should  be  taken  into  account.  A  reduction  of  the  labour  costs 
by  -2,03 %  could  compensate  the  introduction  of  a  CO2  tax  by  the  amount  of  40,69  euros  per 
tonne of CO2. 

Because of this compensation, the prices for products with relatively high CO2 content will increase 
whereas prices for products with lower CO2 content will decrease and as a result the environmentally 
friendly behaviour of consumers and producers can be supported. 

The  introducing  of  the  new  CO2  tax  and  the  simultaneous  reduction  of  labour  costs  would  lead  to 
significant  changes  in  commodity  prices  between  +9,80 %  (electricity,  gas,  steam  and  air 
conditioning)  and  -1,25 %  (education  services)  as  results  of  this  compensation  mechanism.  In  this 
way the compensating effect of labour cost reduction is demonstrated. The results show the mitigating 
effect  of  the  compensation  mechanism  for  the  product  prices,  but  the  overall  effect  for  the  CO2 
emission intensive products is still significant. These are the products with higher labour productivity 
and lower compensation of employees compared to the above  mentioned product and services with 
higher  labour  intensity  and  lower  CO2  emission content.  Compensation in the form  of  reducing  the 
labour cost can stimulate the demand for labour and can increase employment. Positive effects for the 
environment as well as for the employment (double dividend) can be expected. 

 
 
 
 
 
 
 
 
 
Analysis and quantification of a new fiscally neutral European tax.  
Executive summary 

All the results are based on calculations for “Europe as a whole”. The results for different Member 
States  differ  significantly  from  the  “European  average”.  The  introduction  of  a  uniform  tax  rate  in 
Europe will affect the Member States in a different manner. The price effect for electricity, gas, steam 
and air conditioning differs from 2,73 % (France) to 25,18 % (Greece), with significant price change 
for Hungary, Germany and Slovenia (about 10 %).  

The results for the overall price effect for selected EU Member countries show small-sized decrease in 
prices for the labour intensive services and increasing prices of CO2 intensive products like electricity, 
gas,  steam  and  air  conditioning,  basic  metals,  other  non-metal  mineral  products  and  air  transport 
services.  The  overall  price  effect  is  determined  primarily  by  the  CO2  emission  intensity  and  the 
overall effect for the CO2 emission intensive products remain significant. These are the products with 
higher labour productivity and lower compensation of employees compared to the above mentioned 
product and services with higher labour intensity and lower CO2 emission content.  

The key-factor for the intensity of the cost-push effect is the emission content of particular products. 
The way to mitigate the negative effect of introducing the CO2 tax for the product prices is to promote 
technological innovations leading to decreasing emission intensity.  

The  present  study  can  be  seen  as  a  “feasibility  study”  which  illustrates  the  high  potential  of  input-
output analysis to address such policy questions. The results provide orders of magnitude primary but 
show that more detailed analyses could contribute significantly to evidence based policy making. The 
study offers insight into some of the implications of moving towards a new European tax aiming at 
reducing negative environmental effects and lowering labour costs at the same time. The focus was on 
the very relevant “first round effects” of such a change. The effects induced by a reaction of producers 
and consumers to the changes in relative prices are not covered and require the development of more 
complex  models,  dealing  with  the  economic  effect  of  introducing  a  CO2  emission  tax. 

 
 
 
 
 
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© European Union, 2016 
 Reproduction is authorised provided the source is acknowledged. 

Catalogue nr:QE-04-16-081-EN-N 
ISBN:978-92-830-3052-2 
doi:10.2864/416691